Ana Kresina says you can live by design and build wealth by creating a money system to increase your income and reduce expenses while investing the difference.
Ana is a podcaster, financial educator, and co-author of the recently published ‘How To Not Work Forever’.
On the Get Invested podcast, Ana joined Bushy Martin to discuss how anyone, irrespective of their financial story and circumstances, can get a better grasp on their finances and make savvy money decisions.
“For most of us, money comes in and money goes out. Now the question is, do you know how much money is coming in and going out? What are you spending your money on? For a lot of people, having some kind of budget in place is really important. It doesn’t matter what budgeting system you choose, you need to find one that works for you so that you have an understanding of where your money is going,” Ana said.
Growing your savings versus paying off debt
How and when a person pays off their loans is largely dependent on the type of debt they possess and how it impacts upon future investment decisions.
“There are a couple of different types of debts. There can be consumer debt or personal debt or HECS-HELP debt, and all those can be looked at differently,” Ana said.
“With consumer debt, it also compounds in the same way that investments compound as well, so it’s really important to think about debt and paying it off now. Consumer debt can stifle you when it comes to getting a mortgage or getting some kind of loans in the future, and actually they eat into your money, so paying those off is usually better strategically.
“With HECS-HELP debt, it really depends on what the percentage is at. Some debts you should consider based on what it’s indexed at. Then when it comes to other debts such as your house debt, well that’s another thing you need to consider as well depending what the inflation is at versus whether you want to invest.
“So with finance, there are a lot of tools you can use. You’re not going to use the screwdriver or the hammer for every single thing, but knowing which one you need to use at what time is really advantageous.”
Paying off your loan versus long-term investments
Ana explained the pros and cons of focusing on paying down one house debt versus investing and building wealth for the long-term.
“Some people would rather pay down their house debt as opposed to invest, whereas others want to build wealth for the long run. You don’t get income when you are paying down your mortgage, whereas you do have earning capacity with investing. But the other side is you’re going to be taxed on that, whereas if you’re paying down your house you’re not getting taxed, and that is absolute pure savings there,” she said.
“You might feel better emotionally about paying down your house, and that’s totally fine, and it’s a decision you might want to make based on your goals and what your values are. But what happens when you pay down your house is you’re still going to have expenses that you need to pay for. You can’t sell off a bathroom or a bedroom in order to have extra money, so knowing what your goals are is really important, and how you’re going to fund your lifestyle in the future. We’ve seen a lot of people that reach retirement and they have a fully paid down house, however they have no passive income to live off of or very little in their super, so it’s important to think about that as early as you can.
“It also depends on where you are in your mortgage – are you at the beginning of your loan where there’s a lot of interest that’s being paid, or are you at the end where it’s more principal you’re paying off.”
Increasing your income versus decreasing your expenses
There are several ways to reduce expenses while continuing to increase income, in order to find ‘spare money’ to invest.
“A lot of us feel like we don’t have a lot of money. We might not be able to put some money aside. For some people you might be able to find $20, and for others it’s going to be $2,000. But for most of us there is some wiggle room that we can have when it comes to investing, and if you can’t there are ways to get more money. One of the really obvious ones is getting raise, but other ways are picking up some side hustles. A lot of us have skill sets that we can get other people to pay for, whether it’s consulting or freelance writing or writing code. There are a lot of things that people can do in order to increase their income,” Ana said.
“You can only decrease your expenses to a certain amount because you’re always going to have a baseline, whether it’s your mortgage or rent or food costs. It cannot be at zero because you’re always going to have to spend money. But the sky is the limit when it comes to your income. You can always increase your income a certain percentage, so why wouldn’t we want to do that. And the bigger that gap is between your expenses and income, the more room you have to save to invest. Then by investing, you’re going to be building wealth because you’re buying assets that are generating income which are paying you back.”
Listen to the full interview here.
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